The notion of China as “uninvestable” is simply wrong

Apr 17, 2024
Starbucks Coffee shop in Shanghai, China.

Despite challenges, including the lingering impacts of the COVID-19 pandemic and structural concerns, voices from within the business community underscore a robust economic outlook.

Having lived in Beijing, China’s capital, for more than 10 years, it does not surprise me to see people hurry to work with cups of Starbucks coffee. The coffee-drinking culture has swept big cities in China and there are over 300 Starbucks stores in Beijing alone. But when I took a vacation back in my hometown, some 1500 km away from Beijing, it did surprise me when I saw my friends, among others, swarm into local Starbucks stores.

By Chinese standards, located in the southwest of Hubei Province and surrounded by big mountains, my hometown, Enshi, is a quite small county-level city and may be one of the under-developed cities in China. It did not even have a railway station or a highway until the 2010s. Normally, world brands would avoid a small city like this.

Later I learned that the two Starbucks stores in Enshi were newly opened in September 2023 on the same day, part of an ambitious plan of the U.S. company to open 3,000 new stores in China by 2025. That means one new store every nine hours. And many of these new stores will be opened in smaller towns like Enshi as the company ventures into lower-tier cities in China.

The expansion of the American coffee chain runs in stark contrast to what I have read in some Western media. According to the Wall Street Journal, foreign investors have “fallen confidence” in China as it “isn’t recovering from the pandemic as quickly as hoped.” In a more exaggerated report, Newsweek, a U.S. weekly news magazine, wrote “China, a mecca for foreign investment just a few years ago, is struggling to court international investors as its economy loses stream.”

But is that so? Not quite. Instead of fallen confidence, it’s more like a reallocation of retained earnings influenced by different interest rates between China and the United States.

To curb inflation, the U.S. Federal Reserve has raised interest rates, to a record high in two decades. China, on the contrary, has cut interest rates to a record low. As a result, overseas capital may, as per usual practice, transfer a portion of retained earnings abroad. This profit-driven move differs fundamentally from the logic of “lack of confidence in the Chinese market.”

While some transfer money out of China for quick profit elsewhere, others do so because of companies’ restructuring. Some firms had withdrawn earnings from China as “part of their long-term cycles” of taking profits “once their projects reach a specific scale and profitability,” Michael Hart, president of the American Chamber of Commerce in China, told BBC. “The withdrawal of profits does not necessarily indicate that companies are unhappy with China, but rather that their investments here have matured.”

China is not just the only emerging economies that are facing declining foreign direct investment. India saw the net FDI flowing into the country decline by almost 40 percent year-on-year in the first 10 months of the financial year 2024. That did not get much coverage in the Western media.

This is not to say that China has nothing to worry about its economy. It has. Many small businesses had to close due to the COVID-19 pandemic. Consumer confidence needs further boosts. The property market is recovering, but not strong enough. The central government is working with local governments to fix the debt problem, and more time is needed. In the long run, the aging population and shrinking workforce pose challenges to economic growth and the sustainability of the pension and healthcare systems.

But to say that China is “uninvestable” would be utterly wrong. China still has many policy options in its toolbox. With more policies pending, the risks in the property market and financial sector will be properly managed. China boasts the world’s largest market, with significant potential domestic demand and strong economic resilience.

In addition, the transition towards smart manufacturing and green development, represented by the surge in electric vehicles, is directing investments, resources, and talent toward emerging industries like renewable energy and electrification.

The shift is driving the country’s industrial advancement, diversifying trade, and bolstering the stability of industrial and supply chains both domestically and internationally. Consequently, it is reshaping the Chinese economy at an accelerating pace.

Despite the negative tone of some Western media about the Chinese market, companies have recognised China’s economic potential and have shown continued confidence. In the annual China Business Climate Survey released by AmCham China in February, half of the 343 members surveyed placed China as their first choice or within their top three investment destinations globally, a 5-percent increase year-on-year.

“I don’t think you can treat the world’s second-largest economy as either an alternative investment or un-investable, that would be wide of the mark,” John Bilton, head of global multi-asset strategy at JPMorgan Asset Management, told CNBC’s “Squawk Box Europe.”

In December 2023, JPMorgan Chase increased its stake in Bilibili from 6.94 percent to 7.22 percent. In January 2024, JPMorgan Chase acquired an additional 109,700 shares of China International Travel Service, increasing its stake from 6.93 percent to 7.02 percent. During the same period, funds under the group also increased their holdings in the Chinese electrical appliance manufacturer Midea Group and Yangtze Power, a hydroelectricity company.

Companies from Germany, the economic powerhouse of the European Union, have also increased investment in China. In 2023, Germany’s FDI in China reached 12.7 billion U.S. dollars, marking a 4-percent rise compared to the previous year, according to a study by the German Economic Institute based on data from the German Federal Bank. The cumulative investment in China over the past three years has matched the total investment in the six years from 2015 to 2020.

While some companies choose to increase investments in China because of its gigantic market size, like Starbucks, some choose to do so because of its production capacity. Tesla, for example, has faced multiple challenges in its operation in Germany, from an arson attack to accusations of water pollution. Its Shanghai mega factory, in contrast, delivered 947,000 vehicles in 2023, a 33 percent increase from the previous year. More than half of the over 1.8 million electric vehicles Tesla globally delivered last year came from Shanghai.

Still, others choose to tap its innovation potential. China continues to be a key innovation and research hub for Bosch Group in addition to being a significant market, said Xu Daquan, president of Bosch China, adding that Bosch intends to maintain its stronghold in the Chinese market. In 2023, Bosch Group’s sales in China reached 19.5 billion dollars, a 5.2 percent year-on-year growth, with nearly 58,000 employees in the country. Apple’s CEO Tim Cook also pledged to expand its applied research initiatives in China when attending a development forum in Beijing.

Their votes of confidence are unmistakable, and are perhaps the best proof of a resilient Chinese economy. That’s because the judgment of experienced entrepreneurs is always closer to the truth than some one-sided media reports.

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